Saudi Arabia To Tax Foreign Residence As Oil Crisis Continues

The troubles that Saudi Arabia has been facing due to the plunge in oil prices have been discussed many times, most recently when Saudi authorities ordered banks to stop allowing speculators to bet against the Riyal. Liquidity worries have also surfaced, as late last month Saudi Arabia indicated that it was considering paying contractors with government issued bonds - read: IOUs.

GDP growth has slowed significantly...

(Click to enlarge)

While debt to GDP has soared relative to prior years

And Riyal forwards have plunged as bets on devaluation soar (despite government bans)

(Click to enlarge)

Against that backdrop, although oil has rebounded from recent lows, budgets are still light and in an attempt to help raise revenues in the short term (and transition away from dependency on oil in the longer term), the government is weighing an income tax on expat workers. As Bloomberg reports, in a proposal released this week for the country's National Transformation Plan, the kingdom is seeking to tax millions of foreign residents.

The tax is only "an initiative that will be discussed" Finance Minister Ibrahim al-Assaf said. However as Bloomberg notes, the fact that the tax was included in the proposal means that Deputy Crown Prince Mohammed bin Salman is considering the idea. Prince Mohammed has already taken steps to reduce spending, recently cutting fuel and utility subsidies and has proposed reducing the public sector wage bill. The kingdom is also joining other members of the six-nation Gulf Cooperation Council in imposing value-added taxation starting from 2018.

"Deepening the taxation base will be an important step in increasing non-oil revenue, which will likely start with a VAT first, but the discussion of income tax is notable. Introducing the tax could support efforts to create more jobs for nationals, but if it's not done in coordination with the other GCC countries then it will also reduce the competitiveness of Saudi Arabia to attract labor." said chief economist at Abu Dhabi Commercial Bank Monica Malik.

There are nine million foreigners living and working in Saudi Arabia said Mufrej Al-Haqbani, the country's labor minister, and Finance Minister Assaf said that there are no plans to tax Saudi nationals. Related: Shell Unveils New Strategy: 'Leaner and Deeper'

There are varying opinions on whether or not the income tax would be a good idea. Mohammed Alsuwayed, head of capital and money markets at Adeem Capital said "I don't believe it's wise to introduce such a thing at a time when the kingdom is trying hard to attract direct foreign investments and not having income taxes was one of the most attractive prospects here." HSBC Holdings chief economist Simon Williams counters, saying "a 10 percent tax take would be very low by global standards, and wouldn't in itself drive expatriates away given the much greater tax burden they face elsewhere."

Whatever the outcome, it is clear that as Saudi Arabia continues to keep oil production at current levels, hoping to continue to force higher cost producers out of business, something will need to be done in the short term in order to solve the debt levels being used to fund the budget.

By Zerohedge

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